Bold Budget

The budget for the coming fiscal year has been announced at a record level. This is despite falling short of the GTP's proposed level. Optimism reigns, with a projected economic growth of 11.4pc - far higher than the 7.4pc level calculated by the IMF and the AfDB. Both parties agree, however, with the minimal inflationary risk. The high anticipated agricultural yields also contribute to the positive projections. The budget has now been passed onto Parliament for deliberation, and will be approved before July 7, 2014, reports ABDI TSEGAYE, FORTUNE STAFF WRITER.

Sufian Ahmed, minister of Finance & Economic Development.

Ethiopia’s next fiscal year is coming at a decisive time for both the economic planner and the politicians. This year is the last for the ambitious Growth & Transformation Plan (GTP), which started in 2010/11. It is also the last year for the Millennium development Goals (MDGs).

This year is crucial in political terms too, as the nation will conduct its fifth national election since the coming to power of the EPRDF.

The budget for the year, which the Minister of Finance & Economic Development, Sufian Ahmed, presented to the House of Peoples’ Representatives last Tuesday, June 9, 2014, seemed to put the macroeconomic outlook of the country into context, according to his presentation. The budget of 179 billion Br fell short of the 201.1 billion Br the GTP projected, but showed a 15pc improvement on the budget from 2013/14, which ends on July 7, 2014.

The rate in growth of the budget has slowed by three percentage points from its average since 2011. The fact that the increase in budget is now better than the inflationary rate, however, makes the latest budget better than earlier budgets, says Tassew Weldehanna, Research & Technology Transfer vice president at Addis Abeba University.

“The current budget has increased in real terms,” he said.

Monthly aggregate inflation has declined from the peak of 40pc in July 2011 to around nine percent in April 2014.

The MoFED has assumed double digit growth of the economy and a single digit inflation throughout the year, according to Sufian. The Ministry has relied on 10pc growth over the past years to predict 11.4pc growth for the coming year in line with the government’s GTP.

The International Monetary Fund (IMF) and the African Development Bank (AfDB) are not in agreement with government figures, going for a more subdued 7.5pc GDP growth in 2014/15.

However, the assumption of double digit growth for the year ahead is not exaggerated, so long as unexpected shocks do not emerge and agriculture keeps growing, says Seid Nuru (PhD), senior research fellow with the Ethiopian Economic Association.

Both the IMF and the World Bank also seem to agree with the government that the fiscal policy of the coming year will maintain a single digit inflation.

With the low risk of imported inflation and a subsiding inflationary expectation due to the prospect of increased crop production, there will be no risk of high inflation, says Abraham Tekeste (PhD), State Minister of the MoFED.

On the revenue side of the budget, the government is wary of the declining performance of its tax collection, as indicated in the document presented along with a bill to explain the background of its preparation. This is despite the increase in the amount collected. The close to perfect performance of the collection in 2010/11 has declined to 87pc in 2012/13 and further to 71pc over the past nine months of 2013/14. Sufian told MPs that out of the 100 billion Br revenue planned for 2013/14, the government is set to fall short by seven to eight billion Birr.

“In the presence of encouraging economic activities in the country, it is the gap in the tax administration that explains the lower performance of tax revenue collection,” reads the document accompanying the budget bill.

Hence, it is based on this – the assumed 11pc growth rate and continued tax administration reform – that the budget foresees domestic tax revenue of 115.5 billion Br for the new fiscal year. The remaining balance of the expenditure will be covered from non-tax sources, the World Bank’s Protection of Basic Services (PBS), foreign aid and loans.

The budget has assumed that the value of exported goods will grow by 20.5pc, while the value of imported goods will show an increase of 13.1pc. This is amidst a report recently released by the Ministry of Trade (MoT), which shows that the country earned 2.61 billion Br from exports in 10 months, amounting to 61pc of its planned earnings for the year – beating the entire performance of the past year by 12 million Br. The manufacturing sector continues to disappoint, but most of the traditional export items of the country, such as oil seeds, khat and minerals, have succeeded in achieving more than 75pc of their targets. Given the fact that Ethiopia’s major export items are primary products, the good weather forecast for the coming year will result in increased productivity in agriculture, which will in turn boost the export size of these products, Tassew told Fortune.

Abraham also counts on the prospect of much more favourable conditions for the next year.

“All the indications are that the upcoming main harvest season is set to see a significant increase in crop yields,” he said. “The growth of export goods and services will pick up with the finalisation of many projects in the pipeline.”

The new budget will prioritise the completion of existing capital projects, although there will be additional projects and the construction of many office buildings to reduce office rental costs. Education and roads will see no improvement on the budget they were allocated in the current fiscal year; the two sectors will have a budget of 24.5 billion Br and 29 billion Br, respectively, in 2014/15. The total budget disbursed to the education sector in 2010/11 was 23 billion Br. This rose to 30 billion Br the following year and 34.6 billion Br in 2012/13. On the other hand, the roads sector consumed close to 19 billion Br in 2010/11, up to 35 billion Br in 2012/13.

The recurrent expenditure set for the coming year has shown an increase by 38.5pc from the lasting years 32.5 billion Br while the capital budget has seen an increase by less than 10pc from 64.3 billion Br it was in 2013/14.

“If the capital expenditure of the government is to slow down, the economic growth may also experience a slow down,” says Seid. “To prevent such a scenario, industries should overtake agriculture.”

He sees the expansive recurrent budget as the natural consequence of a country in the stage of capital accumulation. Though in its early stage, capital accumulation will create further demand for recurrent expenditure, he said.

For Girma Seifu, the lone opposition MP from MEDREK, however, the proposed capital budget is not reflective of the actual amount of capital expenditure the government is going to spend.

“Except the budget for roads and some water projects, all of the government’s mega projects are not included in the budget,” he told Fortune. “The government has several mega projects, such as railways, sugar and fertiliser factories, as well as electric power generation and transmissions, which are not included in the recent budget bill.”

Among the major economic components of the budget, construction takes a little more than 31 billion Br, while close to 29 billion Br is allocated to the Ethiopian Roads Authority (ERA) to perform the rehabilitation, upgrading and construction of bridges, trunk roads and major link roads. More than nine billion Birr will be used for the construction of about 79 major link roads, according to the budget bill.

The budget put forward is yet to be deliberated on by members of the Budget & Finance Affairs Standing Committee, to whom Parliament referred it to last Tuesday, after hearing Sufian’s speech.

The committee will conduct a hearing with different stakeholders, as well as members of the public on the details of the budget, according to Meselech Wodajo, chairperson of the Committee. Parliament is expected to approve the budget before July 7, 2014, prior to going to a recess.